Regulations With a Subprime Mortgage

Subprime mortgage regulations help lenders size up how much credit a borrower can afford.

According to Investopedia, subprime mortgages finance real estate for people with bad or limited credit histories. Lenders charge higher interest rates to compensate for the risk that these borrowers are more likely to default on their loans. California does not have specific subprime mortgage regulations in place. Instead, regulations are found in interagency guidance issued by the agencies that regulate banks, including the Federal Deposit Insurance Corporation, the Federal Reserve Bank, the Office of the Comptroller of the Currency, the National Credit Union Administration and the Office of Thrift Supervision.

1999 Interagency Guidance on Subprime Lending

According to the Federal Deposit Insurance Corporation, this guidance was provided for traditional banking institutions that, for the first time, were engaging in subprime mortgage lending on a large scale. Many traditional non-bank subprime lenders were leaving the market or were purchased by banks. This guidance emphasizes strong collection procedures, including the use of experienced collectors, quick decisions to foreclose and limiting the use of loan extensions to minimize losses. From a consumer-protection standpoint, the guidance advises the use of a compliance program to monitor the mortgage origination process, ensuring that otherwise creditworthy borrowers are not given subprime mortgages to increase an originator’s bonus.

2001 Expanded Guidance for Subprime Lending Programs

This guidance focused on lending institutions with more than 25 percent of their regulatory capital held in subprime loans. The Office of Thrift Supervision notes that the guidance tightens the use of mortgage delinquency curing methods such as extensions, deferrals and renewals, requiring that lenders obtain evidence of a borrower’s willingness and ability to repay in the form of an updated credit bureau report, employment verifications and debt-to-income ratio calculation. From a consumer protection perspective, lenders are advised to avoid making mortgages that require the pledging of collateral other than the property financed.

2007 Statement on Subprime Mortgage Lending

The agencies issued this guidance to address risks related to adjustable-rate mortgage products sold to subprime borrowers, which contributed heavily to the subprime mortgage meltdown. In particular, the Federal Reserve Board notes the agencies are concerned that these borrowers will not be able to afford increased payments once the mortgage’s initial introductory rate expires. The statement requires lenders to ensure that borrowers can afford repayments given potential rate changes over the life of the mortgage. It also requires that lenders obtain documented evidence of borrowers' income, liabilities and assets. Lenders are encouraged to work constructively with borrowers nearing default to find repayment solutions that are beneficial to the borrower and lender. Lenders are also warned to provide information to borrowers in a “clear and balanced” way that provides access to all mortgage products the borrower qualifies for, not just to subprime products.